behavioural finance

In general, there are three types of problems that require decision making on part of the entrepreneurs and investors. These are
(i)Entry/Seed Funding Decisions (ii) Financing/Investment Decisions, and (iii) Growth/Exit Decisions

These involve two decision makers: (i) Entrepreneurs and (ii) Investors, also known as Venture Capitalists or VCs.

The literature and evidence suggest that the dominant traditional finance theory (namely, the Agency Theory), cannot make any predictions regarding firm “entry” or “exit” issues. “Uncertainty” and “return on investment” remain to be the determining factors in all decision making problems

Your task: is answer the following 3 questions (each section separately)

1. Section #1: Explain why behavioural finance is a more suited approach (compared with the traditional finance) to explain and include risk and uncertainty aspects of decision making. (500 words)

2. Section #2: Provide a critique how financing/investment decision and growth/exit decisions (both by the entrepreneur and investor) can be explained by borrowing the key concepts of behvioural finance theory (you can choose any three for example, information asymmetry (IA), prospect theory, agency theory, Herd Behaviour, Mental accounting; Gambler’s Fallacy; Anchoring; Over Confidence etc. to explain this). (500 words)

3. Section#3: Provide two examples from your readings where the entrepreneurs have shown an understanding of the “behavior finance approaches” in making right decisions (for example, you can comment on why it was the right time for the of Facebook to go for IPO. (500 words)